2.1.1 Internal finance

Question 1

Finance

Answer 1

The management of the investment needed to; open, run and grow a business

Question 2

Internal finance

Answer 2

investment that comes from within a business

Question 3

External finance

Answer 3

Investment that comes from outside the business

Question 4

Reasons for raising finance

Answer 4

• To pay debts, this is likely to be a consolidation loan which may pay off suppliers
• To help a business over a slow trading period - overdraft
• To expand: a business may apply for long term finance such as a loan
• To start-up a business may apply for a loan with a business plan or ask friends and family to invest
• To buy stock: a business would ask a supplier for trade credit (30,60,90 days)

Question 5

Owners capital / personal savings - what is it?

Answer 5

• Also known as owners equity
• it shows the stake the owner has in the business
• this represents the net asset of the company - if all debts were payed off how much would be owed to the owner
• the owner may have used savings or a redundancy pay to start up the business, this in theory is still owed back to the owner although they may never take it back out

Question 6

When is owners capital appropriate?

Answer 6

Sole traders and partnerships would be the two business forms which would mostly use this to expand and grow

Question 7

Retained profit

Answer 7

Any profit left in the business after the cost of sales, fixed overheads, tax and financing costs have been paid - often used to reinvest in the business

Question 8

Advantage of retained profit

Answer 8

No interest to pay

Question 9

Disadvantage of retained profit

Answer 9

One it is used it has gone and cannot be used elsewhere in the business
start ups cannot use this
reduces profit
Conflict between investors

Question 10

Advantages of owners capital

Answer 10

No interest

no dilution of ownership

Question 11

Disadvantages of owners capital

Answer 11

Money is lost if business fails

Limited amount of money

Question 12

When is retained profit appropriate?

Answer 12

A start up will not be able to use this

if business has not been profitable then there won’t be any retained profit

Question 13

Sale of assets

Answer 13

This is an item that the business owns that could be sold to raise cash 
This could be: 
-machinery
-land
-premises 
-vehicles

Question 14

Disadvantages of sale of assets

Answer 14

• the business will no longer have the benefit of that asset and it will not appear on the balance sheet of the company meaning the business will look less attractive to investors
• can be difficult to sell things if they are obsolete
• may not raise enough for growth or expansion

Question 15

Advantages of sale of assets

Answer 15

• no dilution of ownership
• assets can be sold quickly for cash - helpful when a business is growing it may need to raise cash fast to be able to continue trade

Question 16

Owners capital definition

Answer 16

• this is the money invested by the owner in the business, this may have come from their own personal savings

Question 17

When is the sale fo assets appropriate?

Answer 17

• Start ups may not use this

- may not be useful if using for growth or expansion as won’t raise enough